Mermaid Maritime - DBS Research 2017-11-16: Near Term Outlook Is A Mixed Bag

MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Near Term Outlook Is A Mixed Bag

Mermaid Maritime's net loss of c.US$2m in 3Q17 was below expectations.
Low revenue/utilisation in 3Q17 on deferment of subsea jobs and competitive pressure.
Orderbook recovers to US$174m, from US$99m in 2Q.
4Q17 expected to be better q-o-q, but major dry-docking downtime will drag down 1Q18 earnings.

Mermaid’s orderbook at end-3Q17 has recovered to US$174m from the low of US$99m at end-2Q17, boosted by the extension of a contract on the Asiana’s long-term charter in the Middle East. However, continued competitive pressures and a deferment of subsea jobs by oil companies resulted in low vessel utilisation and revenues in 3Q17.
4Q17 should be better as these delayed contracts are executed, but visibility on 2018 recovery is weak at this point. 1Q18 should also be particularly weak as three key vessels go into drydock for their intermediate and 5-year surveys.
Meanwhile, Seadrill’s restructuring process remains an overhang on the stock, as key associate Asia Offshore Drilling (AOD; Seadrill holds a c.66.2% stake) could see impairments/change of ownership if Seadrill’s debt restructuring plan fails to garner support.
On the plus side, Mermaid has a healthy balance sheet and thus does not warrant the kind of distressed valuations seen in other O&M stocks. We maintain our HOLD call on the stock but lower earnings in FY17/FY18F to account for 3Q17 weakness and drydocking downtime in 1Q18.

We note that Mermaid has impaired an above-average proportion of book value of its vessel fleet (c.30%), thus P/BV ratios are more conservative.

Deferment or cancellation of jobs, or negative news relating to AOD’s debt refinancing could result in downward pressure on its share price.

We base our valuation of Mermaid’s core subsea business (excluding stacked vessels) on a P/BV peg of 0.6x and ascribe zero value to associate AOD, giving us a Target Price of S$0.14.

A better-than-expected outcome for associate AOD’s debt refinancing could lead to revaluation.

3Q17 was a weak quarter for Mermaid Maritime as the company reported losses of US$2.04m on the bottomline, which was below expectations. This was due to a sharp drop-off in workload, despite 3Q typically being a seasonally strong quarter (due to lack of strong monsoon winds/tides).
Revenue declined by 32% q-o-q / 42% y-o-y to US$30.2m this quarter, driven by lower vessel utilisation rates on deferments of job start dates by oil majors as well as some issues in the Middle East which led to port closures and thus a re-routing of vessels to their final destinations.

Management expects a better 4Q, as some jobs intended for 3Q are rolled over – all the major vessels should be well utilised in 4Q17. However, going into 2018, 1Q18 looks to be weak as the Commander, Endurer, and Asiana have to undergo surveys in drydock, and there looks to be limited visibility on workload (aside from the Asiana) for the rest of the year.

Mermaid’s orderbook increased to US$174m this quarter, up from a low of US$99m last quarter. About 80% of the orderbook should be recognised in the next one year or so. During the quarter, a one-year extension on the Asiana’s contract in the Middle East was secured, with a total contract value of US$96m, and Mermaid’s portion a ‘major part’ of that figure. The extension contract begins in 4Q17.
Other smaller contracts secured during the quarter include a 21-month submarine cable survey contract for the Resolution (chartered-in vessel) worth US$7m; a 60-day saturation diving and inspection job for the Commander in Malaysia (started in 3Q17); and survey, spool-piece tie-in and free span correction work secured for the Endurer on subsea pipelines in the Middle East (also started in 3Q17).

It was clarified that as part of Seadrill’s restructuring agreement, AOD (66% owned by Seadrill; 33% by Mermaid) was granted a temporary waiver and forbearance from default that may have arisen under AOD’s bank credit facility agreement.
Going forward, the focus will be on how AOD handles the bullet payment of US$180m on its debt facility due in April 2018 (i.e. whether it is able to refinance, or perhaps potentially join in as part of Seadrill’s comprehensive restructuring package).

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-11-16

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